The problem was with lenders who were promoting “Option ARM” loans that had a very low “introductory rate” of say 1% – 2% for a few months, with a stable low payment for 1 year. This type of loan, however, creates negative amortization, where the difference between the payment rate (1-2%) and the actual rate (8%) is added back to the principal of the loan.

The loan had the illusion of low interest and a low payment, but that illusion was not real, even though the payment rate was low the interest rate was very high. When you compare that “deal” to the current fixed rate in the low 6% range, the fixed rate mortgage is clearly a better loan.

The good news about today’s low mortgage rates is that for the hundreds of thousands of people who have those hybrid ARMs that are scheduled to adjust this year, they may be in for a pleasant surprise. Many people are finding that their rates have fallen instead of increasing, as previously feared.

Those who do not want to live with the uncertainty of their ARM – they are considering refinancing to a fixed rate mortgage while the rates are low. Even if your adjustable rate mortgage is going to adjust to a rate lower than the current fixed mortgages, you can certainly buy yourself some peace-of-mind by opting for the low fixed rate mortgage.

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